Mutual Fund NAVs Hit As DHFL Delays Interest Payment On Bonds

Mutual funds have had to take a hit as Dewan Housing Finance Corporation Ltd. delayed payment of interest on non-convertible debentures due on June 4, three people in the mutual fund industry who are aware of the development told BloombergQuint.

Funds having exposure to DHFL’s commercial paper and non-convertible debentures have taken write-downs as per the valuations provided by independent valuation agencies, the people said requesting anonymity. That translates to a write-down of 75 percent of their exposure, the people said.

Rating agencies ICRA Ltd. and Crisil Ratings today downgraded DHFL’s commercial paper to default or ‘D’, citing delays in debt servicing by the home financier on some of its NCDs because of inadequate liquidity. DHFL has Rs 850 crore of outstanding commercial papers. Of which, Crisil said Rs 750 crore is due in June with the first maturity on June 7. The rating agencies expect the commercial paper to be in default on the date of redemption due to inadequate liquidity and limited visibility on fresh fundraising.

This would mean that funds that have already taken a haircut of 75 percent due to delay in interest payment will have to mark down the remaining 25 percent too, as a downgrade to default requires funds having to mark down the entire 100 percent of the exposure concerned.

The mutual fund industry has an exposure of around Rs 6,500 crore to debt of DHFL and its subsidiaries as on April 30. Out of this, DHFL has outstanding commercial papers of Rs 850 crore, according to data available with Morningstar. The remaining Rs 5,650 crore are outstanding NCDs. The Association of Mutual Funds in India data for May hasn’t been released yet.

DHFL Pramerica Medium Term Fund has the maximum exposure of 37.4 percent of assets under management. Its net asset value fell as much as 53.98 percent in a day. It’s followed by DHFL Pramerica Floating Rate Fund and DHFL Pramerica Short Maturity Fund with 31.94 percent and 30.47 percent of AUM, respectively. Their NAVs dropped 48.39 percent and 13.55 percent.

While all the other funds took a hit, one-day change in NAVs of Principal Low Duration Fund and Edelweiss Corporate Bond Fund remained stable.

Most fund houses have already adjusted the NAV of schemes having exposure to DHFL as it is compulsory for asset managers to make these adjustments. The fund houses that haven’t done so should follow suit and the delay is mainly because of the holiday on account of Eid celebrations, said Vijai Mantri, chief investment strategist and founder promoter at JRL Money. Mantri, however, advised investors to focus on their long-term goals and not panic as he expects the crisis to be stemmed like others in the past.

DHFL has tried to address investors’ concerns, making a statement yesterday that the company would make good on the payments later this week.

The company had raised Rs 17,860 crore through securitisations in the first nine months of FY19, and an additional Rs 1,375 crore and Rs 900 crore through two separate developer loan since January this year. But as of April-end, it had only Rs 2,775 crore liquidity in-hand, both Crisil and ICRA had said in their notes then. DHFL now has to pay a cumulative amount of Rs 8,400 crore, including loans and securitisation, by July-end. The mortgage lender expects cash inflows of close to Rs 6,000 crore through loan repayments and proceeds from loan sell-downs, CARE Ratings said in its May 14 report.

Besides, private equity major Blackstone has agreed to buy nearly 80 percent of affordable homes-focused Aadhar Housing Finance Ltd. from the financially stretched Wadhawan group—promoters of DHFL—for an undisclosed sum, newswire PTI had reported in February. The promoters are looking to finalise the sale of their stake in a month, CNBC TV18 today reported quoting people it didn’t name.

Yet, to be sure, written-down NAVs will bounce back only for bonds for which the payment is made. All other schemes for which payments remain due will have to keep their NAVs marked down until they get their money back or the ‘D’ rating is upgraded.

Kaustubh Belapurkar, director of fund research at Morningstar Investment Adviser India said that investors who have invested in the fund need to sit tight for now. “There is no reason for exiting the fund because you have already taken the brunt of the impact,” he told BloombergQuint.

While the pace of recovery will be an overhang, the situation can only improve from here, he said.“DHFL has demonstrated that they are making efforts with stake sales, securitising -- all of that they can do, they are doing.”

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